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AICPA Exam CPA-Financial Topic 3 Question 65 Discussion
Topic #: 3
Tanker Oil Co., a development stage enterprise, incurred the following costs during its first year of operations:
Tanker had no revenue during its first year of operation. What amount may Tanker capitalize as organizational costs?
Choice 'B' is correct. The equity method of accounting is applied retroactively when the investor has acquired 20% ownership. Prior to acquiring the ability to influence the investee, the cost method is proper. The retroactive restatement approach does not mean that this change is the correction of an error (which is now treated retroactively), a change in accounting principle (which is now treated retrospectively), or a change in accounting entity (which is now treated retrospectively). It just means that retroactive restatement is the proper treatment.
Lawrence
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